Tuesday, February 26, 2013

Much has been said about the latest source of stock market rally - the weak Yen. It is back as the favorite carry trade, and EUR/JPY is the biggest beneficiary. So I decided to plot it over SPX, and the result is even better than I thought. EUR/JPY has been leading SPX since the latest leg of the rally began in mid-November. Based on this fact, it is safe to assume that SPX is in for more pain on the downside. There was a pretty negative and decisive reversal on SPX yesterday, but it really came on the heels of EUR/JPY divergence. It did not confirm the highs on SPX for over two weeks now. Forex likes to hunt for stops, and there are stops all the way down to flat-on-the-year on EUR/JPY. If SPX follows, and it has so far, it will also retrace to that flat-on-the-year level.

Please note that I used SPX futures to better reflect the correlation, as forex trades 24 hrs a day.

Monday, February 18, 2013

In the last few weeks I displayed some of the divergences that are present in the market today. In this post I will provide you with some more interesting facts, which will conclude my compilation of the reasons why this time will not be different. I will remain mum on the issue from here on and let the market speak for itself.

Since this bull market in stocks has begun in 2009, the biggest decline occurred in 2011, when technology sector did not confirm new high on SPX. Tech is the largest sector of S&P 500, with 18% weighting right now. Head and shoulders is one ugly chart pattern.

click on chart to enlarge

Hedge funds are now bailing out of gold and piling into equities in droves. Those are some of the brightest minds, but their performance has been less than stellar and has lagged S&P 500 for the most part of this bull market. The fear of Eurogeddon kept them overinvested in gold and underinvested in equities in 2010 and 2011, producing strong equity rallies as they had to get back in and play catch-up. The fear is now gone, as Eurozone is supposedly fixed, hence the gold dump. And the greed has taken over, as they are thinking that this stock market rally got away from them. So now, after SPX is up 125% from the lows in 2009, they suddenly rediscovered the stocks and are at their highest equity market exposure since two months before the previous bull market peaked in October of 2007. This is usually a contrarian signal which leads to steep corrections.

click on charts to enlarge

Speaking of contrarian indicators... Newsletter writers are now as bullish as they were in 2000. Their sentiment reading at or above 70% has produced a valid selling signal on SPX in the past.

click on chart to enlarge

And finally, this is one of the most interesting facts I have seen yet. The chart below displays the correlation between SPX and Eurodollar futures. Adventure in Centrally Planned Paradise may be waiting just ahead.

Tuesday, February 5, 2013

I placed a short SPX trade on close today. I am either incredibly smart or incredibly stupid. Only time will show...

Three weeks ago I decided to cut my SPX long at 1472 and wait for a pullback to the upper 1440s to buy, and then look for a trip above 1500 after that. Obviously, there were no credible pullbacks (or they were too shallow) for me to buy - the stock market went straight up without me. But now that my price target has been reached, and the fact that it was done in such a chasing pattern, I think that this parabolic rise will end badly. Many charts are now in hyperextended mode and are gasping for air, so to speak. At times like these I go against the grain. While I was flat, I knew where I would short, and so I did today. It would have been nice to ride the last 40 SPX points up, but one has to have a trading plan. I followed mine, even though it was flawed. I admit that I was wrong.

After I shorted SPX on close today, I decided to write a poem about it. This was not done to praise myself or display an act of bravado, but merely to have some fun. I hope you will enjoy it...

Followers

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